Vertex Is Tomorrow's Monster Stock

Stocks climbing to 10 times their original price are rare breeds -- but they're not impossible to find. Especially when you have Fools for friends.

The market's best stocks include companies that have risen dozens of times in value by taking advantage of the market's weaknesses. These aren't penny stocks; they're viable companies with sound business prospects that are achieving phenomenal returns. Finding just one or two of these monstrously successful firms can help you establish a winning portfolio.

Stalking the monsterTo find tomorrow's winners, we've enlisted the help of more than 180,000 monster trackers at Motley Fool CAPS who have successfully picked stocks that have doubled, tripled, or even quadrupled in price. This week All-Star member cubaislibre gives us biotech Vertex Pharmaceuticals (NAS: VRTX) as his next monster pick. He made his mark with Baidu.com, which surged 953% after he picked it to outperform the S&P 500, up only 50% in the same time frame.

Of course, you shouldn't jump into the breach just because an All-Star stock picker did. Just consider this as a starting point for your own research of extreme buying opportunities.

Vertex Pharmaceuticals snapshot

Market Cap

$10.6 billion

Revenue, TTM

$1.8 billion

1-Year Stock Return

(3.6%)

Return on Investment

20.8%

Dividend and Yield

N/A

Recent Price

$49.96

CAPS Rating (out of 5)

***

Focusing on the futureDespite a "misinterpretation" of data by an outside vendor, Vertex's cystic fibrosis treatment Kalydeco is still an effective treatment for patients when taken with experimental drug VX-809. And European regulators thought enough of its effectiveness to sign off on its use for CF patients overseas. It already received FDA approval earlier this year, making it the first CF therapy that treats the causes of the disease rather than just the symptoms.

Kalydeco could be the engine that drives Vertex to new highs, pushing it ahead of Gilead Sciences (NAS: GILD) and Novartis (NYS: NVS) in CF treatments. Sales in the first quarter of 2012 were $18.4 million and they surged to $46 million in the second. Now with an EU launch expected soon, sales could really start snowballing, especially if and when VX-809 is approved.

That would be timely as sales of Vertex's hepatitis C treatment Incivek fell more than expected, dropping 8% to $328 million, below analyst forecasts of $360 million. As a result, Vertex reduced guidance for full-year sales of the drug from as much as $1.7 billion down to $1.1 billion-$1.25 billion. Sales were expected to fall, just not by so much.

One too many cocktailsGilead may be poised to conquer the hep C market with its drug GS-7977, which when combined with ribavirin, completely eliminated the hep C virus in genotype 1 patients after four weeks. Bristol-Myers Squibb (NYS: BMY) and Merck (NYS: MRK) may be similarly deflated if Gilead's therapy proves to be the winner it seems to be in trials. Hepatitis C has been a particularly hot niche that drove higher the valuations of many biotechs plying their trade here.

Yet Vertex isn't ceding the field to Gilead and reported early results for a second hep C treatment should exceptionally promising results. ALS-2200 will now begin mid-stage trials to build on the data. With Vertex's valuation based almost wholly on Incivek and to a lesser extent Kalydeco, this new treatment could add leverage to the growth potential. There are also drugs for rheumatoid arthritis and influenza in the pipeline that don't even enter the equation yet.

The perfect mixerInvestors were willing to overlook the disappointing quarterly report and instead focus on what may be. Shares rose after earnings were released based on the strength of the ALS-2200 data. Analysts, though, seem conflicted about whether it can realize its potential.

At 37 times earnings and 21 times estimates, Vertex isn't cheap. Gilead, which at the moment is seen as having perhaps the best-in-class hep C therapy, goes for 16 and 12 times earnings, respectively, while even Bristol and Merck carry lower multiples despite a broader portfolio of options. And investors like CAPS member justaboutperfect think Vertex needs to rebuild credibility after the data flub: "When a Biotech misleads and overstates results from tests to investors, its game over and management should resign and give all their stock options back."

I agree reputations are easily ruined, but I'll be rating the pharma to outperform on CAPS because I think the therapies under development -- both recognized and ignored -- offer a chance for Vertex to show what it's made of. But let me know in the comments section below or on the Vertex Pharmaceuticals CAPS page whether you think the damage is done or it can rise above it.

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